Locums working through their own companies, and the pharmacies they work for, need to stay on top of off-payroll working and IR35 rules as mistakes can prove costly, writes Emma Rawson

Off-payroll working rules are intended to ensure that contractors and the businesses they work for cannot save tax by introducing an intermediary into their contractual arrangements.

For example, a pharmacy wishing to take on a locum could choose to engage them directly. If they were classed as an employee for tax purposes, the pharmacy would have to operate PAYE and would be liable for employers’ NICs (national insurance contributions). Alternatively, the pharmacy could contract via a company owned by the locum (often referred to as a personal service company or ‘PSC’). In the absence of the off-payroll working/IR35 rules, the locum could end up with a lower tax and NIC bill and the pharmacy wouldn’t need to worry about employer NICs or operating PAYE.

To tackle such arrangements, more than 20 years ago, the Government introduced IR35. Under this, the locum has to decide if, ignoring their PSC, they would have been an employee of their client. If they would, the PSC has to account for the appropriate payroll taxes and NICs to HMRC.

Following longstanding concerns over the level of non-compliance with IR35, new rules (referred to as ‘off-payroll working’) were introduced. Under these rules, the responsibility for deciding whether or not a locum should be taxed as an employee is taken out of their hands. Instead, it is up to the pharmacy to determine whether the rules apply and ensure that the correct payroll taxes and NICs are deducted from payments made to the PSC.

Which rules?

Despite the off-payroll working rules, the old IR35 rules have not disappeared. In particular, locums still need to consider IR35 if the end client they are working for is either based wholly overseas or classed as ‘small’. For these purposes, unincorporated clients such as sole traders or partnerships will be small if their turnover does not exceed £10.2 million. Clients that are companies or LLPs need to meet the Companies Act definition of a small company, which broadly requires any two of the following: turnover not exceeding £10.2m, assets not exceeding £5.1m, and no more than 50 employees.

When the rules apply

Off-payroll working and IR35 rules work in very similar ways. The key difference is who makes the decision and is responsible for deducting tax and NICs. Under both regimes, there needs to be an individual worker performing services for a client; services provided through an intermediary (such as a PSC or a partnership) and if the worker had been contracted directly by the engager, they would have been regarded for tax purposes as an employee.

The first two of these conditions are relatively straightforward, but the third is much trickier. In effect, you have to imagine there is a direct contract between the worker and client and consider whether that contract would have been one of employment. If the worker would have been self-employed then off-payroll working/IR35 do not apply. If they would have been an employee, then the rules apply.

What pharmacies should do

The first thing for pharmacies to check is whether they qualify as ‘small’. If they do, they have no obligations under the off-payroll working rules, and it will be up to the locum to worry about IR35 instead.

If they are not small, they need to carefully check their contracts. If any of these aren’t directly with the individual locum or an agency, but are through a PSC or other intermediary, the off-payroll working rules must be considered.

For each contract, the pharmacy needs to consider whether if the locum was engaged directly, they would be considered to be an employee for tax purposes. HMRC’s Check Employment Status for Tax tool on gov.uk may help.

Pharmacies then need to issue a Status Determination Statement (SDS), setting out whether or not they think off-payroll working rules apply and their reasons. A copy of the SDS needs to be given to both the locum and any agency the pharmacy contracts with for their services. If off-payroll working applies, whoever pays the locum’s PSC will need to operate PAYE and deduct tax and NIC from those payments.

What locums need to do

If a locum enters into a contract to provide services via a PSC or partnership, they should first check if the pharmacy they will work for is ‘small’. If it is, the locum will have to consider whether the IR35 rules apply and ensure their PSC accounts for PAYE and NICs accordingly. If it is not small, the locum should receive an SDS from the pharmacy setting out their conclusion as to whether or not off-payroll working applies and the reasons for this. This should be checked carefully for accuracy.

If the rules do apply, payments made to the locum’s PSC will be net of tax and NICs. However, the PSC won’t pay corporation tax and the locum is free to extract the funds as a dividend or salary without paying additional tax or NICs.

If a locum disagrees with the pharmacy’s conclusion as to whether or not off-payroll working applies, they can ask them to reconsider. The pharmacy then has 45 days to either uphold their original decision or issue a new SDS. Pharmacies need to ensure they have procedures in place to handle disagreements and turn them around within the deadline, or they will remain liable for deducting tax and NICs. 

Emma Rawson is a technical officer at the ATT, a professional body for those providing UK tax compliance services.